Jays Pet Supplies purchases its inventory from a variety of suppliers, some of which require a six-
Question:
Jay’s Pet Supplies purchases its inventory from a variety of suppliers, some of which require a six- week lead time before delivery. To ensure that she has a sufficient supply of goods on hand, Ms. Lane, the owner, must maintain a large supply of inventory. The cost of this inventory averages \($40,000\) . She usually finances the purchase of inventory and pays a 10 percent annual finance charge. Ms. Lane’s accountant has suggested that she establish a relationship with a single large distributor who can satisfy all of her orders within a two-week time period. Given this quick turnaround time, she will be able to reduce her average inventory balance to \($10,000\) . Ms. Lane also believes that she could save \($6,000\) per year by reducing phone bills, insurance, and warehouse rental space costs associated with ordering and maintaining the larger level of inventory.
Required:
a. Is the new inventory system available to Ms. Lane a pure or approximate just-in-time system?
b. Based on the information provided, how much of Ms. Lane’s inventory holding cost could be eliminated by taking the accountant’s advice?
Step by Step Answer:
Survey Of Accounting
ISBN: 9780073526775
1st Edition
Authors: Thomas Edmonds, Philip Olds, Frances McNair, Bor-Yi Tsay